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Indian Oil Corporation
Refining margins boost profit; reiterate Hold
Better-than-expected results. Indian Oil Corporation (IOC)
reported PAT of `52.9bn in 2Q on the back of last-minute
compensation from the government for 1HFY11 under-recoveries.
2QFY11 results were better than our estimates due to strong refining
margin of US$6.6/bbl compared with US$2.7/bbl for HPCL and
US$2.8/bbl for BPCL, partly owing to higher inventory gains. Unlike
BPCL and HPCL, IOC has more crude inventories in its inland
refineries and larger production inventories.
Refining margin strong. IOC’s GRM jumped to US$6.6/bbl in 2Q
(US$3.6 in 1Q), though the Singapore-Dubai GRM was up US$0.5/bbl
qoq at US$4.2/bbl. The higher GRM were partly due to inventory gains.
While we expect refining margins to achieve mid-cycle level in FY12-13,
we believe they will be subdued for the next 6-12 months.
companies (OMCs) bore 26% of 1HFY11 under-recoveries,
significantly higher than we expected. Awaiting clarity, we maintain
that ~10% of under-recoveries would be parked in OMCs.
Earnings. We raise our FY11e and FY12e earnings 6% and 11%
respectively, increasing our estimate for refining margins by
US$0.5/bbl and slight increase in refining throughput assumption.
We also introduce FY13 estimates.
Valuation and risks. We raise our target price to `425 from `370
based on: i) PE of 10.4x FY12e EPS and ii) greater value of
investments. We re-iterate Hold. Upside/downside risks:
Favorable/unfavorable decision on diesel de-regulation or subsidy
sharing; higher/lower refining margins; lower/higher crude prices.
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